The purpose of depreciation:
The purpose of depreciation is to allocate the cost of tangible assets to expense, to the accounting periods expected to benefit from the asset’s use. In other words, depreciation is a means of allocating the cost of an asset over its useful life. If there is an asset that isn’t utilized for its entire useful life, for example, if an asset is destroyed or damaged and no longer able to be used in production, it should be taken off the books and the remaining book value would be written off as a loss. On the other hand, if an asset is sold before its useful life expectancy, the gain or loss would be recognized in the company’s books.
Does the book value of a fixed asset tell a user what the asset is worth and should the financial statements reflect the value of fixed assets?
The book value of a fixed asset does not tell the user what the asset is worth. This is because the book value is a calculation designed to tell the user how much the asset has not expired. The financial statements should reflect the value of fixed assets, because investors (and other users) are not necessarily interested in the useful portion of the asset, they would rather know how much the asset is worth. In the very near future GAAP will require the disclosure of the asset’s fair market value in financial statements.
Accounting for the Disposition of Fixed Assets How is the disposition of fixed assets accounted for? The disposition of fixed assets can be done by selling the asset, exchanging the asset, involuntary conversion of the asset, or...
Criteria for Capitalization of Fixed Assets The criteria for capitalization of fixed assets: One decisive factor associated with the capitalization of fixed assets is that the purchase of the asset benefits more than one period. Other...
Methods Used to Calculate Depreciation The different methods used to calculated depreciation: There are several different methods used to calculate depreciation. The activity method, also referred to as the units-of-production method, depreciates assets as a...
The Purpose and Benefits of a Stock Split The purpose and benefits of a stock split: The main purpose of a stock split is to widen ownership of a company’s stock. When a stock splits, it reduces the...
The Purpose of Derivative Instruments The differences between traditional and derivative instruments: The main difference between traditional and derivative instruments is that derivatives are traded on forward markets. The term derivative means to derive a...
Deferred Tax Assets and Deferred Tax Liabilities Deferred tax assets and deferred tax liabilities are derived by: Deferred tax assets are derived from increases in taxes refundable (or saved) in future years as a result of deductible...
